UK - Financial reporting standards are "distorting" the level of pension scheme losses suffered in the financial crisis, effectively hiding around £120bn (€135bn) of losses Aon Consulting has warned.
The consultancy revealed it has now extended the analysis of its Aon200 Index, which tracks the pensions accounting position of the 200 largest privately-sponsored schemes using FRS17, to include scheme funding measures as well as accounting standards to become the Aon200F.
Aon revealed that on an accounting position only, the aggregate deficit of the 200 schemes improved from £25.9 to £7.6bn between the end of March and the end of April, however it warned the "corresponding position on a funding basis would be far worse with a huge deficit of around £130bn".
As a result, the new Aon200F provides an indication of the scale of cash contributions required by the 200 schemes, which showed the funding deficit increased by £100bn between April 2007 and last month, while the accounting deficit "has not changed significantly" despite the volatility in the markets.
Aon said scheme liabilities in company accounts are based on corporate bond yields and as these have soared in the credit crunch this "explains the relative strength of the accounting position versus the funding position". However, when scheme trustees determine contribution levels they generally use a more prudent investment so the deficit is higher.
Sarah Abraham, consultant and actuary at Aon Consulting said: "Confusingly, the apparent cost of running pension schemes, as shown in company accounts, has actually reduced as a result of the credit crunch. This is due purely to the way in which the accounting standards work, with asset falls being masked by reductions in liabilities that are a result of high yields on corporate bonds."
But she warned on a funding basis the "picture changes dramatically", adding "the huge cash funding shortfall we have calculated is not just a theoretical tool: the black hole of £130bn will need to be rectified by additional contributions and could for example, translate into an annual contribution of almost £20bn if the deficit was removed over a ten year period".
And as employers are unlikely to be able to afford such high contributions this could lead to extended recovery plans with lower payments and employers instigating changes to the benefit structure of their schemes to reduce costs.
Despite this "distortion", Aon stressed it is "not advocating a review of the standard at this stage", as Abraham claimed "all kinds of gremlins are hidden in company accounts and it would be unfair to penalise pension schemes in particular at this time. Such a move would only hasten the demise of final salary pension schemes".
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